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The Leland–Toft optimal capital structure model under Poisson observations

Author

Listed:
  • Zbigniew Palmowski

    (Wrocław University of Science and Technology)

  • José Luis Pérez

    (Centro de Investigación en Matemáticas)

  • Budhi Arta Surya

    (Victoria University of Wellington)

  • Kazutoshi Yamazaki

    (Kansai University)

Abstract

This paper revisits the optimal capital structure model with endogenous bankruptcy, first studied by Leland (J. Finance 49:1213–1252, 1994) and Leland and Toft (J. Finance 51:987–1019, 1996). Unlike in the standard case where shareholders continuously observe the asset value and bankruptcy is executed instantaneously without delay, the information of the asset value is assumed to be updated periodically at the jump times of an independent Poisson process. Under a spectrally negative Lévy model, we obtain the optimal bankruptcy strategy and the corresponding capital structure. A series of numerical studies provide an analysis of the sensitivity, with respect to the observation frequency, of the optimal strategies, optimal leverage and credit spreads.

Suggested Citation

  • Zbigniew Palmowski & José Luis Pérez & Budhi Arta Surya & Kazutoshi Yamazaki, 2020. "The Leland–Toft optimal capital structure model under Poisson observations," Finance and Stochastics, Springer, vol. 24(4), pages 1035-1082, October.
    • Handle: RePEc:spr:finsto:v:24:y:2020:i:4:d:10.1007_s00780-020-00431-6
    DOI: 10.1007/s00780-020-00431-6
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    References listed on IDEAS

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    2. Zbigniew Palmowski & José Luis Pérez & Kazutoshi Yamazaki, 2021. "Double continuation regions for American options under Poisson exercise opportunities," Mathematical Finance, Wiley Blackwell, vol. 31(2), pages 722-771, April.

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    More about this item

    Keywords

    Credit risk; Endogenous bankruptcy; Optimal capital structure; Spectrally negative Lévy processes; Term structure of credit spreads;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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